Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 Parker Hannifin Corporation Earnings Conference Call. My name is Anne, and I will be your coordinator for today's call. As a reminder, this conference is being recorded for replay purposes. [Operator Instructions] I would now like to turn the presentation over to Pam Huggins, Vice President and Treasurer of Parker Hannifin. Please proceed.

Pamela Huggins

Thank you, Anne. And for those on the call, you know it's Pam Huggins. But at any rate, good morning. I'd like to welcome you to Parker Hannifin's Third Quarter Fiscal Year 2011 Earnings Release Teleconference.

Joining me today is Don Washkewicz, President and Chairman, Chief Executive Officer and President; and Jon Marten, our Executive Vice President and Chief Financial Officer. For those of you who wish to do so, you may follow today's presentation with the PowerPoint slides that have been presented on Parker's website at www.phstock.com. For those of you not online, the slides will remain posted on the company's Investor Information website. Again, at www.phstock.com, and they will remain there one year after today's call. At this time, reference Slide #2 in the slide deck, which is the safe harbor disclosure statement, obviously addressing forward-looking statements. And if you haven't already done so, please take note of this statement in its entirety.

Moving to Slide #3, this slide as required indicates that in cases where non-GAAP numbers have been used, they've been reconciled to the appropriate GAAP numbers. And again, they're posted on Parker's website.

To cover the agenda for today, on Slide #4. The call will be in 4 parts. First, Don Washkewicz, Chairman, Chief Executive Officer and President, will provide highlights for the quarter. Second, I'll provide a review, including key performance measures of the third quarter, concluding with the revised fiscal year 2011 guidance. The third part of the call will consist of the standard Q&A session, which I know you're all looking forward to. And for the fourth part of the call today, Don will close with some final comments.

So at this time, I'll turn it over to Don and ask that you refer to Slide #5 titled Third Quarter Fiscal Year '11 Highlights.

Donald Washkewicz

Thanks, Pam, and welcome to everyone on the call. The way I thought I would start this meeting out would be to just kind of take a look back at what we did last quarter, our second quarter, and then the guidance that we provided at that time and then contrast that with how we performed this quarter.

So if you remember, the second quarter for Parker was extremely strong performance, with record sales and net income and earnings per share well ahead of expectations. And actually, if you go back even before the second quarter, if you look at the first quarter, the first quarter had a series of records as well. So this is -- we're going into the third quarter of the year, setting pretty much all-time records for the company.

At that time, back in the second quarter, we anticipated that earnings for the year would be in the range of $5.80 to $6.20, or a midpoint of around $6, and that sales would increase greater than 17% and that the segment operating margins would be approximately 15% for the entire company, and that our marginal return on sales would be approximately 30%. So that's what we told you back in the second quarter, kind of giving you a little outlook of what was going to happen before the third quarter and beyond.

So here we are, at the end of the third quarter. And I'm really very pleased to report that based on our third quarter actual performance and current outlook for our business, we are certainly on track. And in fact, we've increased our expectations for sales and diluted earnings per share for the balance of the year.

I'll take just a minute now to review our third quarter results and to point out some of the records that we've had for this quarter. The sales were a third quarter record, all-time record for the company and never achieved before. Net income was an all-time quarterly record at $282 million. Diluted earnings per share was an all-time quarterly record, never achieved before at $1.68. And as we look forward to quarter four, I want you to reflect back on the fact that the third quarter was a record, all-time record for the company. So we'll get into some of those discussions later. We can talk about the comparison as to what the third quarter delivered and what we're delivering in the fourth.

Total segment operating margins were a third quarter record at 14.8%, which was just under our 15% target. But more interesting, when you look at our Industrial North American margins, they led the way with 16.1% margins. Again, when we talk about our 15% target for the company, we have been talking about trying to maintain that as an average over the cycle, understanding that we'd like to be a little higher than that at the better parts of the cycle and when we're on the down part of the cycle we'll be a little bit less than that. But we would like to -- the goal of the company, the stated goal for quite some time now, has been to try to target that at 15% over cycle. And the reason for the 15% has been -- it puts us on the top quartile of our peer group, a very difficult peer group that we've established for the company.

We didn't just pick the number out of the air. 15% puts us in that top quartile. So to have Industrial North America today at 16.1% margins, we're very, very pleased with that. And likewise, our Industrial International margins, which were quite depressed as you know through the recession, came in at an impressive 15.5%. So both of those major segments of our business are running well ahead of that 15% target. Our MROS, or marginal return on sales, was 28% in the quarter, and year-to-date, reached 33%. And as I think everyone understands the math here, the MROS is the change in total segment margin divided by the change in sales. We're certainly very pleased with the MROS numbers, and that the thing that's really pretty exciting is we talked about at the beginning of this fiscal year, that we wanted to hit 30% for the year. And it looks now based on the guidance that we're giving you, based on our nine months' actual numbers, that it looks like we're going to hit right about that 30% number. So we're pretty pleased. Now keep in mind, each segment has their own set of things going on, ups and downs and the gives and takes and that nothing's linear here. So the way we got the 30% may not be exactly the way we thought we're going to get there at the beginning of the year. But the good news is, we're there nevertheless.

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